Welcome back. We've talked about preparation and the bargaining, and closing stages. We talked about preparation in some detail. We talked about in the bargaining stage, this exchange of information, and then the exchange of offers. That's what I want to talk about today, is this exchange of offers. To think about how we start throwing numbers around, should you go first? What does going first mean? There's some books out there that say, never make the first offer. I'm typically disparaging of advice that if both sides enacted it, you'd get nowhere. If I say never go first and your counterpart takes that same advice, boy, that's going to be a long negotiation. Instead, what I want to suggest is that going first can confer some substantial advantages. There are a lot of cases where people do go first. When people are selling a house, they're listing the price, they've gone first. People selling cars, they list a price, they've gone first. Think about what is it that those opening offers do and when should you go first? First, what do they do? The first price that's listed, anchors the negotiation. It sets expectations, it becomes the reference points and everything you think about is relative to that. You think about a list price for a house and people are thinking about, well, did you pay the list price or did you get it for some discount? A discount relative to the list price. Or even buying a car, everybody knows that sticker price is just a printed up number, it's a suggested price. But we think about things relative to that price, and we're often pulled to think about the value as close to that. Now, anchoring turns out to be extremely important, even experts are anchored by list prices. Here's the idea. That first price can really anchor the negotiation, it sets expectations. Should we be making that first offer? The answer I want to suggest is that sometimes, it should be the case you make the first offer when you have a good sense of what that ballpark is. When you know what prices are reasonable, give a sense of the market, then going first will help you anchor the negotiation. If you have no idea what reasonable prices are, if you don't understand the market, then that's a chance for you to sit back and wait, and really focus on the exchange of information to gather more information. You should be doing more preparation, more homework to gather that information. That's the idea about the first offer. Should you make the first offer? The answer I'm suggesting is yes, when you have a good sense of what that ballpark is. Tamara Hausen, worked for SmithKline Beecham, in business development. She would go out and buy small biotech companies. Her advice was, I'm always happy to go first. I do this day in, day out. I have a team of people, they come up with valuations for companies. I'm happy to go first because I'm happy to set the agenda for the negotiation. Going first can be an advantage. When we make offers, the first offer or responding to that first offer, we want to make sure we're appealing to optimistic but justifiable, objective criteria. We could respond by saying, look, here are the comparables or here's what people paid before, or here's the math that I've done to justify this price. What's important to recognize is that math, those other criteria can be very compelling. But there are lots of ways to do the math. What assumptions have we implicitly made where we can justify prices here or there? But the idea is to substantiate the offers that we make, rather just throwing out numbers. We throw out round numbers, it looks like we're just making things up. What people are going to hear is, well, that's a really soft number, there's lot of room in there. Now, we also want be careful as we react to an offer. There are two ideas here as we react to an offer. The first is, if somebody's opening offer is just ridiculous, we want to reject that and not say, hey, we're going to have a negotiation dance that starts with your first move and then I'm going to counter it because if we think about the negotiation process, one of the key ideas we want to think about is that, we often end up in terms of the negotiation dynamics. We'll dive a bit more into in the second module, but I want to pick this up here. The idea is that we often end up splitting the difference between the first two offers. If the first offer seems crazy, and we just counter that, we want to anticipate that, hey, we might end up moving somewhere in the middle. If we don't like that middle point, we want to think very carefully about when we react to that offer, by saying, hey, here's why that offer is out of the ballpark, maybe we should take a break, come back later when we have a shared sense of facts or a shared sense of understanding of what we're talking about because that number is crazy. I need you to come back only for reasonable or thoughtful about making a deal. We're effectively rejecting a number, forcing somebody to come back with something more reasonable. We can counter that to then work towards a deal. Reacting to an offer, first, is this totally out of the ballpark or not? Then second, the emotional reaction as we react to it. I've actually been in a car negotiation where the car salesperson, it wasn't a very convincing, this fake laughter. I made an offer and they forced themselves to laugh. That's a forced reaction, but they're trying to communicate information through that reaction. Or you think about sometimes a home contractor. They'll say look, I have your bid for you. Well, what is it? Well, I want to deliver it in person. The reason why they want to deliver in person, is they want to make that offer to you in person and see your reaction to it. How are you reacting to that offer? Or I want to buy the house, often it's done through agents, but if we can meet the seller, you see their reaction and that'll give you a sense of if you need to go much higher or not. We want to think about these reactions to offers. Sometimes people will make up reactions, but sometimes they'll be authentic, and you can glean information from those reactions. You want to think about your reactions as your guiding people's expectations. That's the first offer, reacting to it, and to think about the exchange of offers. The idea here with the exchange of offers is, we engage in what's called the negotiation dance. We can think about the first person makes an offer, the second person makes offer. We typically have alternating bids and asks. Typically, it's say the seller lists the price, the buyer makes a proposal before, the seller makes a concession, the buyer makes concession, the seller makes a concession, and so on. We often end up splitting the difference at the end. We tend to see larger concessions at the beginning, smaller concessions at the end, and if we're matching concessions as we go and split difference at the end, we're likely to end up somewhere at the midpoint of those first two prices. You want to think about that, that is anticipate that's where you're headed as the negotiation dance is likely to unfold. What other idea about the negotiation dance? The negotiation dance is likely to be relatively long for goods, for things where the relationship doesn't matter as much. The negotiation dance for a car may be relatively long. The negotiation dance for a salary tends to be relatively short. There, the relationship is so important, you don't want a lot of uncertainty about what somebody's worth paying if that person's going to be working with you. The length of the dance is going to be different across contexts. The pace of the negotiation. Manage the pace. If you need a break, if you just learned new information that really appends the way you're thinking about things, take a break. Don't feel like just because you started, you have to be compelled to finish. Sometimes we might feel this psychological pressure where people might have done something like, imagine you walk into a car dealership, the seller says, hey, are you ready to buy a car today at the right price? That seems innocuous enough. You might say, yes. Then later, after you've been negotiated, they say, well, does this price seem right to you? You're like, yeah, I think that price is right. Then they say, well, you said you are ready to buy a car today at the right price. Here, using this conformation trap, I'm getting you to be consistent. You said you're ready to buy a car, so here you should buy a car today. If you feel like, hey, wait a minute, this does seem like the right price, but I'm not fully ready today. Let me just take a break and think about it. Be in control of the pace of the negotiation. Again, take a break if you need one. Those are some key ideas about the exchange of offers. We'll come back to some of these throughout the course, but I want to think about preparation. A lot of work that happens in preparation. Then the exchange of information. We're going to really learn information. Then we're going to exchange offers. Sometimes go first, sometimes ask that person to redo that offer if we think it's crazy and we react to those offers, and we engage in a negotiation dance. Then make sure at the end that we're ready to commit to that deal.
